In early November, China’s Ministry of Finance floated a $2 billion bond issue in Riyadh, Saudi Arabia. The choice of place instead of some better-recognized financial market says a lot about Beijing’s desire to court Saudi Arabia and perhaps someday supplant the United States as the oil-rich kingdom’s strategic partner.
The decision to denominate the issue in U.S. dollars instead of yuan announces that Beijing, despite its grand ambitions for the yuan as a global currency, recognizes the dollar’s still overwhelming global advantages.
Beijing is well aware that it can complete such a transaction at a lower cost and at greater convenience in Shanghai or Hong Kong—in dollars or yuan—than in Riyadh. Against this background, the move makes important economic and diplomatic considerations for China. It happened in Riyadh entirely as a favor to Saudi Arabia, which is trying to build up its capital markets and make itself a target for international finance and investment.
On the economic side of this decision lies oil. For all of China’s talks about green energy, oil remains essential for the country’s economy and must be imported. Saudi Arabia is especially attractive in this respect because it offers a more reliable and more plentiful source of oil than Iran, for instance, and other places as well.
At the same time, Beijing wants to take advantage of the tensions between the United States and Saudi Arabia, which have grown during the Biden administration. These tensions are related to the war the Saudis were pursuing against the Houthis in Yemen and, among other things, harsh American accusations concerning the death of a Saudi journalist.
The Chinese Communist Party (CCP) sees this tension as a way to move the kingdom away from Washington’s diplomatic orbit and toward Beijing’s. Consistent with the CCP’s other ambitions, it also seems likely that Beijing has the long-term goal of eventually replacing Washington as Riyadh’s primary strategic partner.
More revealing still in this issue is that it is denominated in U.S. dollars. The decision starkly contrasts Beijing’s past insistence that its trade deals, including those with Saudi Arabia, be written in yuan. That Chinese insistence reflects Beijing’s efforts to advance the yuan as a global currency and eventually as a substitute for the dollar as the preeminent international currency and global “reserve asset,” as the bankers say. To issue a dollar-denominated bond admits that despite these high ambitions, China also needs dollars, not for straightforward trade purposes because China’s trade surplus with the United States makes for a net dollar inflow into China, but instead because of its unrivaled quality as a global source of global liquidity.
Much as it must rankle with the CCP, this is the third time in recent years that China has had to issue bonds in currencies other than the yuan. Not too long ago, Beijing floated a dollar-denominated bond issue in Hong Kong. In September, it floated a 2 billion euro-denominated issue in Paris, effectively admitting that the euro, in addition to the dollar, offered more global liquidity than the yuan. Speculation holds that all these efforts to raise global liquidity stem from Beijing’s renewed commitment to its Belt and Road Initiative. Whatever the purpose, these actions are an implicit admission that the yuan still has a long way to go before it gets to where Beijing wants.
This latest episode in Saudi Arabia hardly constitutes a fulcrum on which global or Chinese finance will pivot. But it does reveal—Beijing’s rhetoric to the contrary—that the CCP knows how its ambitions of global dominance, which seemed so near when Chinese economics and finance were improving rapidly, have faded in the face of the country’s economic and financial troubles.
